Regulatory issues for life and pensions insuranceins-union.ru/U_FILE/MS_DOC/Regulatory Issues for...

TACIS Insurance Advisory Services II

Report:Component 2

“Regulatory Issues for Life Insurance and for Insured Pensions”

Prepared by:Virginia Murray

Professor Constantine KoutsopoulosDemetrius Floudas

IKRP Rokas & Partners

This project is funded by the European Union

A project implemented byPricewaterhouseCoopers Risk Management (Belgium), ZAO PricewaterhouseCoopers Audit, (Moscow)IKRP Rokas & Partners Law Firm, McGraw-Hill International (UK) Limited (Standard and Poor’s)

Regulatory issues for life insurers and for insured pensions

TABLE OF CONTENTSExecutive Summary.....................................................................................3Introduction.................................................................................................5

A. Separation of long-term life assets and other life insurance assets. .7B. Policy terms and consumer protection..............................................8C. Solvency..........................................................................................10

1. Minimum guarantee fund.............................................................112. Solvency margin..........................................................................113. Assessment of assets and of liabilities.........................................12

D. Insurance provisions.......................................................................131. Technical reserves.......................................................................132. Mathematical reserves................................................................14

E. Assets and investments..................................................................151. Investment rules..........................................................................152. Admissible assets........................................................................163. Diversification of Assets...............................................................174. Insurance deposits.......................................................................175. Derivatives...................................................................................176. Connected companies.................................................................17

F. Distribution of surplus (bonuses)....................................................18G. Unit linked products........................................................................18H. Reinsurance....................................................................................19I. Shareholders & managers...............................................................20J. The appointed actuary....................................................................21

1. The appointed actuary concept...................................................212. Some principles regarding appointed actuaries...........................223. Duties of the appointed actuary..................................................23

K. The auditor......................................................................................24L. Benefit guarantee funds (Compensation schemes)........................24M. Relation to state pensions...............................................................25N. Relation to occupational retirement schemes.................................27O. Taxation..........................................................................................29P. Annuities and pension income........................................................31Q. Sex discrimination in insurance and in pensions.............................31

Conclusions and recommendations...........................................................33

Annex I. Annex IV, section B of the recast Life Directive (2002/83/EC)....37Annex II. Article 20 of the 2002 Life Directive...........................................39Annex III. Article 23 of the 2002 Life Directive..........................................41Annex IV. Article 24(1) of the EU Directive (2002/83)...............................44

This project is funded by the EU.


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Executive Summary

The problems faced by most state social security systems make evident the supplementary role that private insurance and occupational pension schemes are called to play and, therefore, the great need to have thorough and effective supervision of those areas. Furthermore, due to increased job mobility, pension portability becomes an important issue: for occupational pension schemes to be maximally effective, provisions have to be made for a transfer of pension funds (both within a country and across borders) when changing employer.

Private pensions and individual life insurance involve insurance contracts often spanning forty or more years and policy conditions (e.g., premiums) set for the entire duration of the contract. In contrast to yearly renewable coverages, where normally annual premiums can be changed, the long-term commitments undertaken by a life insurer demand extreme actuarial care in setting policy conditions, in pricing policies and in the periodic valuation of the resulting liabilities. Beyond that, it is vital to ensure that the assets backing an insurer's long-term life liabilities prove adequate in meeting those liabilities fully and in a timely fashion (asset-liability matching).

It is equally important that assets allocated to long-term liabilities be conservatively invested and valued and that there be controls to ensure that assets set aside for long-term risks are not used to cover short-term risks or investment in unrelated activities (e.g., connected companies). The widely publicized failure of one of the largest and oldest UK life insurance companies (Equitable Life) and the current dispute over assessment of liabilities between the UK supervisory authority (the FSA) and Europe’s largest mutual insurer, Standard Life, show that the proper assessment of long-term liabilities of life insurance companies is of primary importance.

Given the significance of long-term insurance or pension policies in personal financial planning, it is also vital that policy terms be fair and that proper information be provided to policyholders concerning the likely benefits to be expected from a policy. Other consumer protection areas include surrender values, proper administration of bonuses, fair settlement of claims and realistic sales illustrations.

Though quite distinct, the parts played by the actuary and by the auditor in assisting the supervisory authority are of key importance. Within any existing legal or regulatory constraints, the proper valuation of liabilities stemming from long-term risks is the responsibility of the actuary. The auditor's responsibility on



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the other hand is to make sure that the company accounts are in accordance with the law and conform to generally accepted (and appropriately conservative) accounting principles. A strong, well-organized and technically knowledgeable national association of insurers can also have a benign influence on market operations: besides making available helpful information, it can mediate in disputes between companies and clients and even admonish members that misbehave.

There are a number of issues regarding the relationship between private insurance and state pension provision. In the presence of current demographic and economic conditions, states are facing the difficult task of safeguarding the adequacy of pensions without jeopardizing the financial sustainability of the pensions system. A mixture of pay-as-you-go (state pensions) and of effectively supervised pension plans based on capitalization (occupational retirement schemes, private insurance) appears to be the solution. The success of such a blend, however depends on careful planning on the part of the state and on tax and other incentives that will facilitate the development of private pensions supplementing the state social security pension.

A final point of discussion is the issue of the legitimacy of gender discrimination in insurance premiums and in pension contributions. The European Commission has recently issued a draft directive imposing "unisex policy pricing", but this directive has been strongly criticized by the Comité Européen des Assurances on the ground of the difference between the life expectancy of men and women.



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Introduction

Life insurance can play a significant role both in protecting a policyholder’s dependents in case of untimely death and in furnishing financial security for the elderly. Private pension insurance is of increasing importance in the light of the pressure being increasingly placed on social security systems in the developed world as the number of taxpaying workers decreases in relation to the increasing number of retired persons. Most European countries rely on a pay-as-you-go state-supported pension system by which the pension bill for the retired is met with social security contributions or with a combination of social security contributions and state budget funds. These countries are now taking, or will soon have to take, difficult decisions to reduce retirement benefits and/or delay the age at which such benefits become payable and/or raise contributions. Workers currently in employment stand to lose out from any of these decisions. Governments would therefore be wise to encourage this generation to plan ahead for their own retirement taking into account that the state may not be as generous to them as it has been to their parents. In order to compensate for the planned reduction of benefits afforded under statutory schemes, massive support for the development of private pension provision has been made available by European governments mainly in the form of making private pension contributions tax deductible. Germany has even introduced direct grants for pension contributions for people of lower incomes and for families unable to take advantage of the tax deductions.

Group pension schemes offered as part of an employment package also play an important role in ensuring adequate provision for the retired. Employers conclude a group scheme with an insurer whereby, based on employer contributions (and sometimes employer and employee contributions), the insured employee is guaranteed upon retirement either a lump sum or a life pension equal to a certain percentage of final salary. In relation to such schemes, a key issue is the portability of pensions, i.e., the ability of employees to transfer contributions made on their behalf to the occupational scheme of their new employer.

Within the EU system of classification, life insurance includes whole life insurance (insurance payable upon death at any time), term insurance (insurance payable upon death within a specified time interval), pure endowment (insurance payable upon survival to a stipulated age), endowment insurance (insurance payable either upon survival to a stipulated age or upon earlier death) as well as more special coverages such as life insurance with return of premiums, marriage



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insurance and birth insurance (art. 2 par. 1 (a) of 2002/83 Directive1, hereinafter referred to as "the Consolidated Life Directive"). In Russian Law “On Organization of Insurance Business in the Russian Federation”, life insurance is quite similar: it involves the obligation of an insurer to pay compensation in case of death of the insured or in case the insured reaches the age specified in the insurance contract; the 2003 Amendments to the above Law (introduced by the Federal Law dated 10.12.2003 №172-FZ) define the risk as ‘citizens’ coming to a certain age or term; death; occurrence of other events in the life of citizens’ (Art.4.1).

Long-term life insurance is quite different from short-term yearly renewable insurance coverages. The form of supervision to be applied to such insurance must therefore be carefully tailored to its specific character and particularly to ensuring that life insurance companies have suitable and sufficient assets to be able to meet engagements often spanning 30 to 60 years. Since life insurance is a "consumer product", there are also important issues regarding the information that must be provided by insurance companies before the conclusion, and during the life, of a policy.

Supervisory authorities are responsible for monitoring the financial health of life insurance undertakings. To ensure that policyholders and beneficiaries are adequately protected, life insurance undertakings must be licensed and supervised in accordance with special rules and taking into account the actuarial characteristics of long-term life coverages.

1 Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life insurance



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A. Separation of long-term life assets and other life insurance assets

Undertakings formed after the dates referred to in art. 18 (3) of the Consolidated Life Directive may not be licensed to conduct both life and non-life insurance. According to articles 6 par.1 (b) and 18 of the Directive, life insurers must limit their business to life insurance and to insurance coverages directly related thereto, to the exclusion of all other commercial business. (Permitted coverages include the so-called supplementary coverages or "riders" such as personal accident, short-term and long-term disability and sickness.) Undertakings which on the dates referred to in Article 18 (3) carried on both life and non-life business are permitted to continue to do so, provided that funds relating to the two types of business are totally segregated. Total segregation means that, though legally we have one insurance company, administratively there are two "companies"; there can be no cash flows of any kind from one to the other, and the liabilities of each and assets backing those liabilities are reckoned separately. In this way, the respective interests of life and non-life policyholders are safeguarded and neither side is called to bear costs generated by the other branch.

In Russia, article 28 par.2 of the Federal Law No 4015-I of November 1992 on the Organization of Insurance Business in the Russian Federation (with the amendments of 1997, 1999, 2002 and 2003) clearly requires separate accounting for life and for non-life operations.

However, even within life insurance, long-term insurance funds (mathematical reserves) must be kept separate from short-term technical reserves (e.g., unearned premium reserves for annually renewable supplementary benefits and outstanding claims reserves for all coverages including basic life insurance). It must be pointed out, however, that supplementary benefits such as permanent health insurance (UK) and long-term disability pensions are actuarially akin to basic long-term life insurances and should ideally involve mathematical reserves.

The ISD must therefore ensure that all assets backing mathematical reserves be kept separate from other assets of the life insurance business. These assets should be placed in a separate "long-term insurance fund". The insurance company should maintain records indicating the particular assets that are backing each block of long-term liabilities and should be precluded from using such assets for other purposes. These measures are vital to prevent insurance companies abusing these funds, which could easily lead to the company being unable to pay its obligations in the more distant future. There may be a temptation to allow use of long-term funds for short-term purposes if it can be



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proved actuarially that the long-term funds are in excess of the corresponding liabilities, but the temptation should probably be resisted. If such an exception is granted, it is open to abuse and it should be very carefully controlled by the ISD.

Allocation of funds within the long-term insurance fund should not result in unfair treatment of any given class of policyholders. However, the practice of selecting suitable assets for different product classes (asset-liability matching) should not be construed as unfair.

B. Policy terms and consumer protection

Under European Union legislation, insurance contracts are freely determined by the parties (insurer and insured). According to article 6 para. 5 of the Consolidated Life Directive, Member States cannot require the prior approval or the systematic notification of general and special policy provisions. The supervisory authority is however entitled to make non-systematic inspections of policy terms and to intervene if unlawful or unfair policy terms are being used to the prejudice of policyholders and beneficiaries. In order to gain protection against unfair terms used in insurance policies, insurance company clients may also rely on the provisions of Directive 93/13 on the protection of the consumer against unfair contractual terms (art.7).

The ISD should also ensure that life companies use fair and responsible sales methods in promoting pensions and life insurance. The information provided to the policy applicant should be accurate and, above all, realistic (it should not exaggerate the potential benefits under the policy). The exact nature of actual guarantees and the lack of other guarantees should be clearly explained. Bonus illustrations should be realistic and, for unit linked products, the company should represent the past fund performance in a proper manner2 and the client should be explicitly warned that past fund performance is not a guarantee (or even a predictor) of future fund performance. Full disclosure of facts is also necessary during the life of each policy. Policyholders must be regularly informed about the value of their funds and about all other events affecting their benefits.

The Insurance Supervisory Department of the Russian Federation continues to require pre-approval of policy terms and conditions. Article 32 Law on the Organization of Insurance Business in the Russian Federation states that, to obtain a license for conducting insurance activity, insurance companies must

2 As an example of guidance on this issue, see the FSA newsletter “Standardizing Past Performance”, December 2003, at www.fsa.gov.uk



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http://www.fsa.gov.uk/


present inter alia the rules of insurance (conditions) governing different types of insurance.

A sine qua non clause of basic life insurance policies is the so-called non-forfeiture clause. This clause specifies that, in case premiums on a life policy (or pension plan) cease to be paid or the policy lapses otherwise, a certain sum (variously called cash value or surrender value) is owed to the policyholder, the magnitude of the sum depending on how long the policy has been in force. National legislation must make the payment of a surrender value mandatory even though, due to competition, no company could afford not to pay cash values to policyholders that withdraw before the completion of their policy's term. The surrender value provision was introduced by the 2003 Amendments (see Law №172-FZ of 10.12.2003) to the Law on the Organization of Insurance Business in the RF, Article 10(7) of which provides that a sum will be returned to the policyholder ‘within the limits of the insurance reserve set up in compliance with the established procedure as of the date of cancellation of the insurance contract’. The calculation of the cash value depends on the magnitude of the policy's mathematical reserve when the policy is cancelled and is normally equal to that mathematical reserve reduced by the amount of policy acquisition expenses that are still unamortized when the policy lapses. It is obvious that life policies with no mathematical reserve or a "negligible" mathematical reserve (short-term or medium-term death insurance at young or moderate ages being the classic example) will not provide surrender values.

Surrender values of traditional products are guaranteed and a table of surrender values by policy duration should be given to the policyholder when the policy is issued. Indeed, Annex II to the Third Life Directive specifies, as part of the information to be provided in a clear and accurate manner and in writing to prospective policyholders before the contract is concluded, "the indication of surrender and paid-up values and the extent to which they are guaranteed". (It should be pointed out, however, that the so-called traditional insurance products (as opposed to unit linked and other "variable" products) normally provide guaranteed surrender values.) The mandatory disclosure of surrender values enables the policyholder to know the residual value (cash value) of the policy at all times. Some EU Member States require insurers to disclose the nature of commissions, management fees and other charges. It is our view that this information is of relatively little value to the prospective policyholder: the surrender value criterion is sufficient since the prospective client will be indifferent between two (otherwise equivalent) policies with the same surrender



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value (how the total policy charges break up into components is rather academic when the end result for the policyholder is the same).

Some EU Member States (e.g., UK) that offer tax deferral for "approved" pension funds limit the right of early surrender3. While we applaud the social aspect of this restriction (it intends to prevent people from spending funds intended to provide old-age security), we still deem it preferable to allow free surrenders and to handle early surrenders by appropriately taxing the cash value in the case of premature surrenders. A related issue is the ability of the policyholder to take a loan against the policy's cash value. While this should certainly be allowed in the case of life insurance and "private" (i.e., not tax approved) pensions, it may have (just like the surrender of the policy) to be restricted in the case of tax approved pension schemes.

Article 11 point 2 of the Law on the Organisation of Insurance Business in the Russian Federation (4015-1/1992, as amended) and article 954 of the Russia’s Civil Code state, as a general principle to which the insurance market must aspire in due course, that insurance premium rates, even for compulsory insurance, are set independently by insurance companies. At present, calculations of insurance tariffs with attached methodology of actuarial calculations and reference to the source of the initial data as well as the structure of tariff rates must be submitted for an insurer to obtain a license (subparagr.11 of p.2 Art.32 of the Law on the Organization of Insurance Business in the RF”). Furthermore, the Order of the Russian Supervision Service No. 02-02/18 of June 28, 1996 on the method of Calculating Life Insurance Rates sets out a detailed procedure for the calculation of life insurance rates. The Order’s preamble, however, states that "the present method has been devised to render methodological aid in the calculation of life insurance rates", and thus the method adopted by this Order is not compulsory for insurance companies.

Pursuant to the Consolidated Life Directive, life insurance contracts must give policyholders the opportunity to withdraw from the contract if (a) the company did not comply, prior to the conclusion of the contract, with all the mandatory disclosure requirements; or (b) the policy as issued does not correspond to what the prospective policyholder applied for. The policyholder may even withdraw "without cause" (without specifying the reason), in which case the company may be allowed to keep some premium for expenses. Notice of cancellation must be given relatively quickly (between 14 to 30 days from the moment that the

3 See the basic UK tax authority guidance on the issue at http://www.inlandrevenue.gov.uk/pdfs/ir78.htm



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http://www.inlandrevenue.gov.uk/pdfs/ir78.htm


policyholder is handed the policy documents). Russian insurance law does not make such a provision. Since entering into a long-term investment program is a very important decision, consumers should have an opportunity to change their minds once they have all the official documentation concerning their insurance / investment plan. This opportunity is of course even more necessary if the company has failed to deliver, in the form of binding documents, what it promised during the sales process. The consumer's opportunity to get out of a "bad deal" is particularly important in new markets, where sales methods may not be all that professional.

C. Solvency

In the European Union, the financial supervision of each life insurer includes the periodic monitoring of the insurer's degree of solvency. This monitoring normally takes place on an annual basis at the close of each exercise (financial year). If circumstances require it, however, solvency may be reviewed more frequently or verified ad hoc at any time.

1. Minimum guarantee fund

The minimum guarantee fund is equal to one-third of the solvency margin the insurer is required to possess. At the same time, regardless of the size of the solvency margin, the minimum guarantee fund cannot be less than a specified monetary amount which depends on the types of insurance conducted by the insurer. For life insurance, this minimum is 3 million Euros. In certain circumstances, an example being insurers entering the market for the first time, the ISD should have the right to demand a higher minimum guarantee fund.

2. Solvency margin

The basic EU rule regarding an insurer's solvency is that the solvency margin actually held (possessed) by the insurer may not be less than the solvency margin technically required given the size of the insurer's business as measured by insurance premiums and by insurance claims. The required solvency margin is a monetary amount (a "number") equal to the maximum of two calculations, one based on premiums and one based on claims. Being a function of business volume, the required solvency margin increases as a company grows and acquires more business. The solvency margin actually held by an insurance company corresponds to the company's "free funds", i.e., to the excess of total



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company assets over total company liabilities (For more information, see Annex I to the present report).

Assets that may be offered towards "covering" the required solvency margin basically consist of the company's paid-up share capital, of any statutory or free "general purpose company reserves" (not insurance reserves!) and of profit brought forward (current exercise profit which was not distributed (was retained)). National law permitting, profit reserves appearing in the balance sheet and consisting of funds that have not been distributed to the policyholders may be included provided they can be used to offset losses.

The Russian law (art. 27 of the Law No. 4015-1 on the Organization of Insurance Business in the Russian Federation and the Order of the Ministry of Finance of the Russian Federation No 90N, 2001) deals with solvency through the notions of "rated solvency margin" and “actual solvency margin”. Rated solvency margin is an amount calculated on the basis of business volume (i.e., premiums and claims) and thus corresponds to the EU required solvency margin. Actual solvency margin is the insurer's free capital (consisting mainly of the authorized capital, the reserve capital, the supplementary capital less the sum of intangible assets, any overdue amounts receivable and the uncovered losses of the accounting year and of past years). The Order of 2001 stipulates that the actual solvency margin may not be less than the rated solvency margin, which itself cannot be less than the minimum paid-up share capital an insurance company must have in cash (as this is provided for by Law 4015-1, art. 25).

If the solvency margin actually held by an insurer falls below the required solvency margin, the insurer must submit to the supervisory authority (for approval) a financial rehabilitation plan. This plan must include detailed estimates of income and expenditure and balance sheets for the next three years and indicate the financial (e.g., an increase in share capital) and other resources by means of which the results forecast will be realized and return to solvency achieved. The projected figures in the plan must be well documented and all assertions made by the insurer have to be substantiated.

If the financial position of an insurer is seriously deteriorating and the interests of policyholders are at great risk, the supervisory authority shall have the power to oblige the insurer to hold a solvency margin higher than that technically required (art. 38 of the Directive 2002/83). If the supervisory authority is of the opinion that the insurer’s financial situation will deteriorate further, it may also restrict or prohibit the free disposal of the insurer's assets. The license granted to a life



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company may be revoked by the supervisory authority if the company fails seriously to fulfil its obligations concerning solvency margin requirements (art.37, 39 of the Directive 2002/83).

In Russia, if the actual solvency margin falls below the rated solvency margin by more than 30%, the insurance company must file with the Ministry of Finance (for approval) a financial rehabilitation plan together with the financial statements. In the event that an insurance company defaults on the financial rehabilitation plan, it is liable to sanctions (suspension or restriction of its license) in accordance with art. 32.6 of the Law on the Organisation of the Insurance Business.

3. Assessment of assets and of liabilities

Since the actual solvency margin is total assets less total liabilities, determining the actual solvency margin presupposes proper assessment of both assets and liabilities. A life insurer's non insurance liabilities are normally a small percentage of total liabilities, and thus the crucial factor on the liability side is the proper valuation of mathematical and of technical reserves (topic D below). In checking the assessment of liabilities, the ISD must carefully take into account, not only the technical basis of reserves (mortality and interest), but also the precise nature of all policy guarantees and other obligations of the insurer. These obligations include bonus payments if such payments are guaranteed (a practice to be discouraged, not only because it has led several large UK life insurers into serious financial difficulties, but because it introduces yet another risk factor that a new life market is better off without). On the asset side, it is equally important to promulgate prudent asset valuation rules (topic E below). Even if liabilities have been properly estimated, if assets are not valued conservatively, the resulting solvency margin will convey a possibly unjustified sense of financial robustness.

D. Insurance provisions

Insurers are required to establish adequate "insurance provisions" to cover their underwriting liabilities. The European Court of Justice (Case No. 205/84) has ruled that technical reserves do not form part of an insurer's own capital resources.

These provisions are actuarial estimates of the funds that must be set aside ("reserved") to ensure that all insurance obligations undertaken by the insurer will be met in full and in a timely fashion. Insurance provisions can be distinguished into short-term technical reserves and into long-term mathematical reserves. In addition to properly valuing their liabilities (i.e., ensuring the adequacy of the



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necessary reserves), insurers must also make sure that they hold appropriate assets whose value corresponds exactly to the size of the calculated reserves.

1. Technical reserves

(Please see Annex II to the present report for the information on the basic principles for the establishment of technical reserves).

If we leave aside special purpose reserves such as equalization reserves and catastrophe reserves, the principal categories of basic statutory technical reserves are the outstanding claims reserve, which must be held for every type of insurance (non-life and life, short-term and long-term), and the unearned premium reserve/unexpired risks reserve, which is appropriate for annually renewable insurance coverages (both life and non-life).

When a company closes its accounts at the end of a financial year, there are usually insurance claims which (for whatever reason) have not been settled (or have been only partly settled). (The same is true in life, where there may be benefits due before the "financial year end" that have not been paid when the accounts are closed.) All such "outstanding claims" are added and a monetary amount equal to the sum of all outstanding claims is set aside as "outstanding claims reserve" in order to make sure that the necessary funds will be available when the outstanding claims are eventually settled (in the next or any other future financial year). The outstanding claims reserve must make provision, not only for claims known to the company, but even for claims that have occurred during the year being closed but have not been notified to the company (such claims are known as “incurred but not reported” or IBNR).

In annually renewable coverages (both life and non-life), the unearned premium reserve consists of all premium amounts paid to the company prior to the end of the accounting year but relating to periods after the account closing date. It is worth noting that, while the outstanding claims reserve concerns insured events that have occurred, the unearned premium reserve concerns events that may occur in the future or, as we say, "unexpired risks". The unearned premium reserve is usually calculated on a pro rata time basis. However, if there are seasonal variations in the degree of risk or there is otherwise reason to believe that the risk is not uniformly distributed over time, the unearned premium reserve must be appropriately adjusted and we then speak of the unexpired risks reserve.

It is important to have national rules (actuarial principles) governing the calculation of short-term technical reserves.



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2. Mathematical reserves

The preceding remarks leave out long-term life coverages that require mathematical reserves. Mathematical reserves are unexpired risk reserves also, but in contrast to unearned premium reserves, mathematical reserves are intended to cover risks extending over lengthy time periods. A mathematical reserve is required whenever a long-term risk that increases with the passage of time is covered by means of an annual premium that remains constant over time.

Mathematical reserves shall be calculated by a sufficiently prudent prospective actuarial method taking into account all future insurance premiums and all future insurer liabilities as determined by the policy conditions of each contract. The reserve valuation is conducted separately for each type of contract and must be conservative in the sense of including appropriate margins for adverse deviations from the actuarial assumptions (parameter values) used (art. 20 of the Directive 2002/83).

In particular, this Directive (art. 20) provides that the Member States may set a maximum technical interest rate for the calculation of mathematical reserves4. This is a restriction we wholeheartedly recommend since, in long-term contracts, adverse deviations in the insured risk (e.g., mortality) play a lesser role than adverse deviations in the interest rates (most actuarial tables of mortality, disability, etc. are conservative anyway whereas a company has no control over the evolution of market interest rates). With traditional products, a prudent approach (particularly recommended to a fledgling market) is premiums based on a conservative (i.e., low) technical interest rate combined with (non-guaranteed) premium returns at the end of each year. (If desired, these returns can of course take the "non-cash form" of paid-up bonuses.)

To ensure that national regulations regarding insurance provisions are respected, Directive 2002/83 (art. 6 par. 5) stipulates that "the home Member State may require systematic notification of the technical bases used for calculating scales of premiums and technical provisions".

According to Russian law (art. 26 of the Law No. 4015-1 on the Organization of the Insurance Business), insurance companies have to form insurance reserves 4 Commission’s Interpretative Communication, 2000/C-43/03. In relation to establishment of branches and free provision of services between Member States, the Commission takes the view that the branches of insurance undertakings and the insurers operating under the freedom to provide services are not bound by the provisions of the host Member State on maximum technical interest rates. Since the host Member State has no competence as regards financial supervision of an insurance undertaking duly authorized in its home Member State, it follows that it cannot impose compliance with its own prudential principles or check such compliance through substantive control of premium scales.



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(defined as "insurance provisions to meet underwriting liabilities") that include the unearned premium reserve, the reserve for claims reported but still outstanding, the reserve for incurred but not reported claims, the stabilization reserve, and mathematical reserves.

An important issue regarding technical bases is whether the technical basis for life premiums should be the same as the technical basis for life reserves. We feel that, in the initial stages of market development, companies should not be burdened with the added complexity of two different technical bases. Furthermore, if a sufficiently conservative technical interest rate is legislated for reserves, it may be financially difficult for the company to use a higher interest rate for premiums.

E. Assets and investments

Proper assessment of liabilities (correct valuation of reserves) is not enough to ensure that an insurer's obligations will be met: the insurer must have funds equal to the result of the reserve calculation. Except for a small part (intended to serve the company's liquidity needs), these funds must be invested in carefully selected assets and the assets must be conservatively valued.

1. Investment rules

All the assets covering mathematical and technical reserves are invested in accordance with certain rules. The supervisory authorities may lay down detailed rules specifying admissible assets and the administration of such assets (art. 24 par. 2 of Directive 2002/83). Rules for insurance investments are predicated, among other things, on the following principles:

(a) Assets must be conservatively selected with regard to security of the capital invested. As a result, national rules limit admissible assets to investments with low default risk.

(b) While high investment return is a legitimate target, it should be judiciously weighed against the security of capital.

(c) Investment in assets exhibiting a high degree of risk must be restricted to prudent levels. (National legislation often specifies the percentage of total assets that can be invested in certain types of riskier assets.)

(d) Assets must be diversified by category of asset, investment market, economy sector, type of industry, company within each industry, geographical area, and so



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forth. In connection with this principle, many jurisdictions impose limits on the percentage of total assets that can be invested in any particular investment class (see Section 3 below).

(e) The investment portfolio's composition must take account of the company's liquidity needs. National rules limiting, e.g., real estate investments have liquidity in mind.

(f) Investments are best selected with regard to the characteristics of the liabilities the investments are intended to cover (this is an actuarial criterion).

2. Admissible assets

(For information on the assets used for insurance deposits, see Annex IV).

Loans may be accepted as cover of reserves only if they are adequately secured by mortgage or a bank guarantee or otherwise (e.g., a policyholder loan is secured by the cash value of the policy). All real property must be valued at a conservative market value; in Greece, where all property values in urban areas are assigned an ‘objective value’ by the tax authorities for transfer tax purposes, the maximum market value which may be given to real property held by insurance companies is the objective value + 30%. Real property in rural areas is not accepted as part of technical reserves due to the difficulties of reaching a reliable valuation. All buildings forming part of the reserves must be insurance against fire (by a separate insurance company).

The main classes of admissible assets in the Russian Federation are state securities, municipal securities, stock shares, mutual fund shares, and bank deposits. The law stipulates further that all assets must be located in Russia, cannot be pledged or otherwise encumbered and may not be used for any purpose other than to meet the insurance obligations to which the assets relate.

3. Diversification of Assets

(For more information on this issue please see Annex IV to the present report).

4. Insurance deposits

The insurer must submit to the supervisory authority the details of the bank(s) or other credit institution(s) where assets covering reserves are held and administered. The insurance company is obliged to inform the supervisory



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authority of any changes in the size and/or the composition of the insurance deposits within a short time, often three days. The supervisory authority may communicate with the banks or credit institutions to verify statements made by the insurer. If reserves are not held as declared, the authority may revoke the insurer's license.

In the event that the insurance deposit is reduced for any reason, the insurer is obliged to come up (within 10 days) with other admissible assets sufficient to restore the insurance deposit to its proper level.

The list of assets constituting the insurance deposit must be submitted to the supervisory authority three or six months following the approval of the insurer's balance sheet by the general meeting of the company's shareholders (art. 24 of the Directive 2002/83).

5. Derivatives

Derivative instruments (options, swaps) may be used in so far as they contribute to the reduction of investment risk or facilitate efficient portfolio management (art. 23 of the Directive 2002/83). Several EU supervisory authorities therefore include as admissible assets certain derivative products. The use of such products, however, can be very risky and requires great investment expertise. As a result, we feel that admitting such products in Russia at present would be premature.

6. Connected companies

In large groups of companies (and particularly those that include unrelated businesses), there may be a temptation to invest long-term insurance funds in group companies. If this practice is not altogether prohibited, restrictions should be placed on the level of such investments. In the UK, e.g., investment in connected companies and loans and guarantees to connected persons may not exceed 5% of total long-term life funds.

F. Distribution of surplus (bonuses)

Some life policies, known as with-profits policies (UK) or participating policies (USA), pay bonuses (UK) or dividends (USA). These policies normally operate with a premium involving ample margins so that each financial year produces a surplus. This surplus consists of the "actuarial gains" generated by the difference



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between the actuarial assumptions (mortality, interest rate, expenses) made in setting the premium and the actual annual result of the insurance portfolio.

Insurance policy dividends (bonuses) may be paid in cash (premium return) or used to reduce the next premium due or be used as a single premium to buy a paid-up addition to the basic sum insured or even be left with the insurer in an account earning interest. The 2002 Life Directive requires that the insurance company publishes its bases and methods for calculating its bonus provisions (Art.20(2)).

If bonuses are not guaranteed (the case in USA), bonuses do not constitute an additional insurer liability. If bonuses are guaranteed, additional reserves should be set up. In any case, as the Equitable Life incident in the UK has shown, guaranteed bonuses are not a very good idea. It might be added that such a policy is contrary to the initial philosophy of life dividends, which was, on the one hand, that premiums are so ample that company solvency is secured and, on the other hand that, after the results are in, through the operation of dividends the policyholder does not ultimately pay an excessive premium! We obviously advise against guaranteed dividends and advocate the method of conservative premiums with return of premium only whenever actual portfolio experience warrants it.

G. Unit linked products

Unit linked contracts are one kind of a broader class of life insurance plans known as "variable products". The word "variable" is due to the fact that the benefits under such products are not fixed but depend, totally or partly, on investment performance. In unit linked products in particular, the benefits are linked to the value of the shares (called units) of a given mutual fund or to the value of a given security index. A block of unit linked contracts can also be linked to the value of the units of an "internal variable fund" set up within the insurance company.

In the case of unit linked policies, the investment risk (borne by the insurer in traditional products) is transferred to the policyholder (though there may be some guarantees regarding the sum insured). Nevertheless, these contracts can be very attractive as long-term investments since over long time periods market fluctuations are smoothed out. Other advantages of unit linked plans are flexibility and transparency as to the components of total cost (insurance protection, company expenses, investment). A final advantage of unit linked products is that return on equity investments has historically exceeded the return on fixed interest



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instruments. This long-term excess interest is generally of the order of 1/2% to 1% and, while this difference may appear small, it proves to be quite significant when it comes to long time periods. As a result, unit linked products play a very important part in many European insurance markets, exceeding in some cases 50% of total life insurance business.

Within the European Union, special and detailed provisions apply to unit linked contracts (art. 25 of the 2002/83 Directive).

(a) Before the conclusion of a unit linked life contract, the insurer must communicate to the policyholder information regarding the mutual fund to whose units the benefits are linked. In the case of an internal variable fund, a description must be given of the assets constituting the fund. Life insurance policies linked to units must explicitly mention the unit and explain how the value of the unit is calculated. Finally, the regulations of an internal fund form an integral part of the conditions of the insurance policy.

(b) The assets backing a company's unit linked liabilities must themselves be linked to (the same) units (a strong form of asset-liability matching).

(c) The insurance company is obliged to keep a separate register of assets covering obligations relating to investment linked contracts (in the case of several variable funds, a separate register for each fund).

(d) The bank (or other trustee) where variable fund assets are deposited is obliged to inform the supervisory authority at least once a month about the assets disposed by the insurer for the variable fund.

In Russia, there are no specific rules regarding unit linked products and the investment of the assets of such products (or indeed the investment generally of mathematical and of technical reserves).

H. Reinsurance

Reinsurance is a mechanism whereby an insurance company transfers a part of the risks it has assumed to another insurer or, more commonly, to a "professional reinsurer" (i.e., an undertaking that transacts only reinsurance). While sometimes reinsurance is necessary merely because of the sheer size of a given risk, reinsurance is a wide practice with risks of more ordinary size. Besides improving an insurer's chances of remaining solvent through risk sharing, reinsurance can be used to smooth out an insurer's annual results. In the case of life insurance, reinsurance can also be used to lighten a new life company's capital strain caused



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by the need to subsidize the acquisition of business. Finally, besides providing financial security, professional reinsurers can provide technical information and valuable knowhow in risk underwriting and in claims handling.

While primary insurers are extensively supervised, most jurisdictions have little, if any, legislation regulating professional reinsurers (possibly due to a feeling that primary insurers are "professionals" that can look after themselves, in contrast to a primary insurer's policyholders who know nothing about insurance). On the other hand, it is taken for granted that a primary insurer will reinsure and EU law (art. 7 of Directive 2002/83) provides that the business plan a company is obliged to submit when seeking a license must describe the reinsurance strategy that the company intends to pursue.

I. Shareholders & managers

The moral and the professional qualifications of an insurance company's shareholders and top managers are an important issue. Within the EU, when a company applies for a license, it must disclose to the supervisory authority the identity and the particulars of any shareholder who has a "qualified holding" in the company and the extent of that holding (art. 8 of Directive 2002/83). A qualified holding is the direct or indirect control of a significant fraction (10% in the EU) of the company's share capital or voting rights or, in general, the ability to exercise a significant influence on the management of the company (art. 1j of the 2002/83 Directive).

National authorities may also promulgate criteria that the company's directors (board members) and top managers (such as managing director, general manager) must satisfy (art. 13 of Directive 2002/83). It is obviously important that they be individuals that have not been convicted of criminal offenses "of an economic character", that they be individuals of "good character" likely to comply with legal restrictions and to respect generally accepted business ethics. In the case of company executives (top managers with "power of decision"), it is also highly desirable that they have adequate professional / technical qualifications. The 2003 Amendments have provided for a basic requirement that chief executives and chief accountants must have degrees in economics or finance and at least two years’ experience in insurance or other closely-related sphere (Art.32.1 point 1 and 2). The fact that a chief executive or chief accountant has a conviction which has not yet been removed from the record is a reason for denying a licence (Art.32.3 point 1(6)), but there are no provisions by which the ISD could take into account other aspects of a proposed chief executive’s previous



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history which might give cause for concern, such as previous involvement in badly-managed or insolvent companies.

The 2003 Amendments provide for professional qualifications for actuaries. The law should also specify similar moral qualifications for the company actuary (in addition to the professional qualifications required).

Any legal or natural person desiring to acquire a qualified holding in a licensed company must declare this to the supervisory authority (indicating the size of the intended holding). The supervisory authority is given three months to oppose the request and must do so if it is not satisfied as to the qualifications of the person seeking the holding.

The supervisory authority may also take measures to put an end to any influence exercised on a company to the detriment of sound management and may impose sanctions against any directors, managers or shareholders involved (art. 15 of the Directive 2002/83). These include the suspension of a shareholder's voting rights, fines and other administrative penalties. (Such penalties do not preclude penal prosecution in the case of particularly flagrant violations.)

J. The appointed actuary

1. The appointed actuary concept

An important question for any supervisory authority is the relative degree of direct supervision and control of company activities and of reliance on the actuarial profession. (It is worth noting, incidentally, that the way the control is split between supervisors and company actuaries in no way lessens the need for truly qualified actuaries. In order to do its job effectively, a supervisory authority has absolute need of properly trained actuaries. Thus, the lack of adequately trained specialists remains a big problem whether the supervisory authority retains most of the control or delegates a great deal of it to appointed actuaries.)

"Actuarially mature" countries leave a great deal to an actuary designated by the company and approved by the supervisory authority and called variously "appointed actuary" (United Kingdom, Canada, others), "responsible actuary" (Greece), "authorized actuary", and so on. The statutory duties and responsibilities of these actuaries are specified in the law together with the penalties, both administrative and criminal, imposed in the case of dereliction of duty or malfeasance. The extent of an appointed actuary's authority varies from country to country and from time to time. There is, however, a common core of



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duties to which we will come later following some comments about the advisability of having an appointed actuary system.

Incidentally, there is currently considerable interest on the part of the International Association of Insurance Supervisors (IAIS) concerning the role of actuaries in insurance and the specific institution of appointed actuaries.

2. Some principles regarding appointed actuaries

(a) Actuarial expertise is a very important component of the operation of insurance companies, of insurance markets and of insurance supervisors. Thus, the use or non-use of appointed actuaries does not affect, one way or another, a market's total need for well qualified actuaries.

(b) Individuals proposed as appointed actuaries should satisfy a set of well defined criteria (e.g., full membership in an accredited actuarial association, long work experience, special expertise, etc.).

(c) The appointed actuary must be endowed with sufficient independence in order to be able to fulfil his "watchdog activities" without hindrance. Indeed, some jurisdictions require the appointed actuary to advise the supervisory authority when the company's management fails to take account of the appointed actuary's admonitions. Recently, there has been a growing movement to introduce certification by an "external actuary" who is not a company employee (a situation that reminds one of external auditors auditing company accounts). This system has been tentatively introduced and is being tested in Ireland and being discussed in a number of other jurisdictions.

(d) If appointed actuaries are employed, the law must clearly delineate their duties and their obligations as well as their relations with the supervisory authority and with (external) company auditors.

(e) The use of appointed actuaries neither precludes control by the supervisory authority nor indeed relieves the supervisory authority from the obligation to conduct its own scrutiny of company operations (through, e.g., on-site inspections, independent valuations, etc.).

(f) The decision to delegate a certain degree of control to appointed actuaries depends on the "maturity" of the profession in the particular country. When the national association is established, well organized, and has in place a strict code of conduct supplemented by a strict disciplinary process, one may leave a good deal to the appointed actuaries. In markets less mature actuarially, one will



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perforce be more circumspect in assigning duties to appointed actuaries. (We reiterate that assigning less to appointed actuaries merely shifts the need for qualified actuaries to the supervisory authority)

(g) Besides his strictly technical duties, an appointed actuary acts in practice as a "liaison officer" or "contact person" with the supervisory authority, responds to supervisory authority’s inquiries and provides explanations and clarifications. Indeed, in some ways, the appointed actuary is the "supervisory authority's eye" within the company.

(h) The appointed actuary's job is more than technically demanding. The appointed actuary is called upon to play a variety of parts from "the state's watchdog" to "the consumer's advocate", and this while balancing the interests of the shareholders, the policyholders, the general public and the state and looking after the company's financial health.

3. Duties of the appointed actuary

Very specific suggestions for the duties of the appointed actuary to be included in any new law can be made later. At this point, we merely summarize some areas of responsibility within the appointed actuary's purview. These include:

(a) the calculation of all types of insurance provisions and the certification thereof to the

supervisory authority;

(b) the calculation of the company's statutory solvency margin;

(c) the design of products, drafting of policy terms and provisions, and pricing of

benefits;

(d) the formulation of the company's reinsurance policy;

(e) the drawing up of the business plan of a new company applying for an insurer's

license as well as the required refinancing plan for any company not meeting the statutory solvency requirements;

(f) the (non-statutory) tests of company financial strength;

(g) the co-signing (together with company general management and with the



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and joint responsibility for the company's investments.

4. Recent Developments

In the last several years, there has been criticism of the appointed actuary concept. Doubts have been expressed as to the degree of independence of the appointed actuary, who, in the normal course of events, is an employee of the insurance company. There is some opinion that actuarial certifications should be given by an "external actuary" just as accounting certifications are given by an "external auditor". Most actuaries are opposed to this view, feeling that it casts aspersions on their professional independence (guaranteed, they argue, by strict codes of professional conduct). Nevertheless, the external actuary movement has been gaining some ground. E.g., the Society of Actuaries in Ireland has introduced this system on a pilot basis, and it will be interesting to see how things proceed there. On a totally a priori basis, and assuming that supervisors are adequately staffed and exercising effective control, it is rather difficult to see what could be gained by switching from a two-tier system (appointed actuary and supervisor) to a three-tier system (appointed actuary, external actuary and supervisor).

K. The auditor

A life insurer's (as indeed any enterprise's) books and accounts and annual balance sheet must be audited by an independent "external auditor". This auditor supplies an auditing certificate that the company has complied with the law and with the prevailing accounting standards, points out those instances where the company has not done so, and gives an estimate of the effect each such violation has on the company's annual result and on its overall financial standing.

In the European Union, it is further stipulated that the independent auditor has a duty to report promptly to the supervisory authority any finding liable to constitute a material breach of the law or of regulatory acts or to have a serious effect on the financial situation or on the administrative and accounting organization of the company. Such a finding must also be reported if it is detrimental to another company having close links with the insurer being audited.

L. Benefit guarantee funds (Compensation schemes)

Many jurisdictions have set up benefit guarantee funds (similar to the funds covering bank deposits in case a bank becomes insolvent). The required funds



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may be supplied by the market itself (through a levy on all life premiums) or, partly or totally, by the state.

In the EU, the Directive 2001/17/EC refers to the rules applicable in case of winding-up of an insurance undertaking. Winding-up procedures may open either voluntarily (e.g., end of a company's duration) or compulsorily (e.g., insolvency). According to art. 10 of the Directive, Member States shall ensure that insurance claims take precedence over any other claim on the insurance undertaking. Member States may provide for some exceptions concerning taxes or claims by public bodies, claims by social security systems or claims by employees arising from employment contracts. While we appreciate the social policy aspect of giving precedence to the wages of employees, we have serious reservations about giving precedence to state claims (taxes, etc.). Such precedence could be legislated if there exists a state benefit guarantee fund to compensate the policyholders.

While the precedence of policyholder claims affords some protection, an insolvent insurer's assets may still not be sufficient to satisfy all policyholder claims. To deal with this problem, some Member States (e.g., UK) have provided that policyholders of insurance companies authorized by any Member State may obtain redress through a State Compensation Scheme. Such schemes act as a "safety net" for consumers but do not always offer total restitution of loss. A usual restriction is to stipulate a maximum compensation (regardless of the actual loss if the loss exceeds the maximum). Another common restriction provides, for losses exceeding a fixed sum, the payment of that fixed sum and only a percentage of the loss exceeding that sum.

The Russian law does not provide a compensation scheme in case of an insurance company's insolvency. At present, the Russian life market faces too many "birth pains" to devote attention to such a scheme. It is, however, something that should be looked into in due time since such a scheme encourages the growth of life insurance by providing important benefit security to policyholders.

M. Relation to state pensions

Over the coming decades, the EU will face a significant acceleration of demographic ageing due mainly to continuing longevity increases, to decreased fertility since the 1970's and to the post World War II "baby boom generation" reaching retirement age. All three factors combine to produce a major financial



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challenge for state pension systems as the number of pensioners rapidly increases and the size of the economically active population diminishes. There is a risk that the resulting old age dependency ratio will, in the not too distant future, place an unsustainable financial burden on the active population and will adversely affect Europe’s economic growth potential.

Several European Councils5 have reviewed the implications of ageing populations for maintaining adequate and sustainable pensions. A joint report by the Social Protection Committee addressed to the European Council in Laaken (December 2001) suggested measures designed "to help Member States progressively develop their own policies so as to safeguard the adequacy of pensions while maintaining their financial sustainability and facing the challenges of changing social needs". The Barcelona Council (2002) called "for the reform of pension systems to be accelerated to ensure that they are financially sustainable and meet their social objectives".

To ensure the financial adequacy of pension systems, European governments are pursuing a number of objectives:

(a) Reduce public debt;

(b) Achieve high rates of economic growth;

(c) Achieve high levels of employment, thereby increasing state pension contributions, with emphasis on increasing covered employment by making sure that contributions are paid for all women and all immigrants;

(d) Increase retirement ages;

(e) Promote, through tax and other incentives, private pensions and occupational pension schemes (topic N below).

In most Member States, statutory pension schemes provide earnings-related pensions, thus contributing to the maintenance of citizens' living standards after retirement. Benefits under these pension schemes are based either on the earnings received during a specific number of years towards the end of the career or (increasingly) on earnings received throughout the entire career. The usual retirement age is 60 or 65 years.

5 The European Council consists of the Heads of State or Government of all Member States of the European Union, plus the President of the Commission. The European Council defines the general political guidelines it deems necessary for the development of the Union. No developments of genuine importance for the Union's internal structure or for its external relations occur without approval at a "summit meeting" (meeting of the European Council).



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In contrast to pay-as-you-go social security pensions, the amount of a private pension and/or occupational scheme pension is based on capitalization methods. This means that the amount of pension a given person will get is the exact actuarial equivalent of the contributions made by that person and/or on behalf of that person. The age at which the pension begins is contractually determined by the parties involved. Since a private pension is predicated on the actuarial equivalence between contributions and pension payments, it must be paid independently of the size of any state pension. On the other hand, it is quite acceptable to have a so-called "integrated pension plan", which is intended to supplement the state pension (such a plan involves actuarially determined contributions which are of course lower than they would be if the private pension were paid disregarding the state pension).

N. Relation to occupational retirement schemes

Occupational retirement schemes are group pensions, the members of the group sharing the same profession or the same trade or working in the same sector of industry or of services. Such groups may set up an institution for the exclusive purpose of handling their pension scheme or, more commonly, address themselves to an existing financial institution (e.g., insurer or bank). In most Member States, such institutions make collective agreements with trade groups or direct agreements with self-employed and employed persons. State social security schemes are excluded from the rules applicable to occupational schemes.

In the EU, Directive 2003/41, recently adopted, provides the necessary framework for the operation of occupational retirement schemes and sets rules concerning the supervision of institutions offering occupational retirement pensions. The main provisions of this Directive are:

(a) Every institution must draw up annual accounts and reports for each pension scheme it administers;

(b) Every institution must draw up a statement of investment principles and review it at least every three years. The supervisory authority shall have the power to examine this statement and to assess its validity;

(c) Supervisory authorities must be provided with adequate rights of information and powers of intervention with respect to the institutions and to the persons managing them;



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(d) Mathematical provisions must be calculated on a prudent basis and, in particular, the maximum interest rates must be chosen in accordance with the relevant national rules. Furthermore, sufficient assets must be held to cover the mathematical reserves.

Two competition law issues may arise in connection with occupational schemes:

(a) Membership in these schemes is usually mandatory: The European Court of Justice regards such schemes as undertakings and hence requires a case by case assessment of whether mandatory membership is justified by social goals. In the Albany6 case, the ECJ ruled that "If articles 3 (g) of the Treaty, article 85 (1) thereof and 118, 118b thereof are construed as an effective and consistent body of provisions, it follows that agreements concluded in the context of collective negotiations between management and labour, in pursuit of social policy objectives such as the improvement of conditions of work and employment, must, by virtue of their nature and purpose, be regarded as falling outside the scope of Article 85(1) of the Treaty."

"An understanding in the form of a collective agreement which sets up in a particular sector a supplementary pension scheme to be managed by a pension fund to which affiliation may be made compulsory by the public authorities does not, by virtue of its nature and purpose, fall within the scope of Article 85(1) of the Treaty. Such a scheme seeks generally to guarantee a certain level of pension for all workers in that sector and therefore contributes directly to improving one of their working conditions, namely their remuneration."

(b) Financial institutions (e.g., insurers) regulated by other Directives are excluded from the scope of Directive 2003/41. As these institutions may also offer occupational pension services, it is important to guard against distortions of competition. Such distortions may be avoided by applying, to the occupational pension business of life insurance companies, the prudential requirements of the Consolidated Life Directive.

In Russia, Federal Law 14-FZ of 10.01.2003 on "Introduction of Amendments and Additions to the Federal Law on Non-state Pension Funds" constitutes the legal framework for occupational retirement schemes in Russia. To obtain a license for exercising pension insurance, the fund has to comply with the following requirements:

6 Judgment of the Court of 21 September 1999(Albany International BV v. Stichting Bedrijfspensioenfonds Textielindustrie (C-67/96))



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(a) The head of the fund’s executive body must have occupied executive positions in funds, insurance companies or other financial institutions for at least three years, higher legal or financial-and-economic education (a special professional training, if he has other education), he must not have previous convictions for committing economic crimes, as well as medium gravity crimes, grave crimes and especially grave crimes;

(b) The fund’s chief accountant must have a professional working record of at least three years, higher education, he must not have previous convictions for committing economic crimes, as well as medium gravity crimes, grave and especially grave crimes.

Other license requirements, including procedures for suspending, revoking, and renewing the license, shall be established by the Russian Government. To ensure its solvency, a fund shall form adequate pension reserves (art. 18). A fund’s activities shall be subject to annual actuarial assessment by an actuary, and the actuarial opinion shall be submitted by the fund to the authorized federal body not later than July 30.

The manner of investing pension funds must ensure the security, profitability and diversification of the investments as well as the transparency of the process of placing pension reserves.

Whereas life insurance companies may offer both private pensions and occupational retirement pensions, financial institutions that manage occupational schemes may not offer private pensions. In EU law, obligatory pension insurance is only effected through state agencies and funds. On the contrary, in Russia non-state funds are allowed to offer obligatory pension insurance as well as non-state pension insurance and professional insurance (art. 2). There is also excessive control on the investment policy of the non-state funds as they can only place their reserves in state securities and other investments determined by the Russian Government.

O. Taxation

Tax incentives are the principal policy instruments for promoting the growth of private pensions. As a minimum, both employee and employer contributions should be fully tax deductible. Ideally, investment results should also be exempt and benefits (pensions in payment) taxed as income. The main reason for Member States to have such a tax deferral policy is to encourage their citizens to save for their old age. A side benefit is that it will help Member States to deal with the



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“demographic time-bomb”, as a State will receive tax revenues at a time when the old age dependency ratio will be much worse than today. Direct financial support in the form of subsidies (as introduced by the latest German pension reform) or rules that make membership in such schemes mandatory are other means to deal with ageing populations and promote private or occupational insurance.

Many Member States do not allow tax deduction for pension contributions paid to a pension fund in another Member State. This effectively seals off the national markets from competition from other Member States and constitutes a major obstacle to the free movement of workers. To deal with this problem, the Commission issued a Communication on the elimination of tax obstacles to the cross-border provision of occupational pensions. In the Danner case7, the European Court of Justice also ruled that article 49 of the EC Treaty precluded Finland from disallowing the tax deductibility if it did not at the same time preclude the taxation of the benefits paid by foreign pension providers.

On the contrary, Russian taxation rules grant less incentive for the growth of private and occupational pensions, although recent amendments have improved the basis for healthy growth of this sector.

Contributions by Russian employers to pension funds for their employees are taxed as follows:

(1) long-term life insurance agreements, pension insurance and (or) non-state pension fund scheme contributions are profits tax deductible up to a maximum of 12% of the employer’s total payroll expenses (excluding insurance/pension fund contributions).

Life insurance agreements should be for not less than 5 years during which no insurance payments should be effected (except on the death of the insured). Pensions under pension insurance and pension fund agreements should be paid only provided the insured meets the criteria established by the Russian legislation for payment of state pensions. Life and pension insurance, non-state pension fund agreements should not be changed with respect to essential conditions or terminated (other than due to force majeure circumstances); otherwise the employer would need to pay profits tax with respect to premiums/contributions made at the moment of such change/termination.

7 C-136/2000, judgment on 3 October 2002, the Danner case was about a German doctor who moved to Finland and continued to pay contributions to a German pension scheme. Finland refused the tax deduction.



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(2) However, contributions that employers make in favour of their employees under long-term life insurance agreements, pension insurance and (or) non-state pension fund schemes are subject to unified social tax (UST). Exclusion applies to contributions that are not profits tax deductible (e.g. if the above 12% threshold is exceeded or certain deductibility criteria are not met).

It should be noted that the regime of so-called joint pension accounts (as opposed to individual pension accounts) used under some agreements with non-state pension funds allows to postpone or even avoid UST payments. Until the end of 2003, contributions made by employers in favour of their employees to non-state pension funds and to insurance companies for pension insurance above 2,000 roubles per year constituted a taxable benefit for employees (the threshold is increased to 5,000 roubles from 1 January 2004). Pension payments on retirement are not taxable. The regime of “joint” pension accounts with non-state pension funds may help defer the tax payment.

Insurance payments under long-term insurance agreements (more than five years with no insurance payments during this period) are not taxable for policyholders.

The effect of the previous system was that, although the pension itself is tax free when the person has entered retirement, employees in Russia had less tax incentive to invest in pension funds while they are working and employers have less tax incentive to make pension contributions for their staff, as employees were taxed and employers continues to be liable to UST on pension contributions. The expectation is that with the removal of the first of these tax obstacles, the system will be likely to attract much more premium. It remains to be seen what the effect of the amendments coming into force in 2005 will be, which will further encourage employers and employees to enter into life insurance arrangements, subject to taxation of the pension paid.

P. Annuities and pension income

In connection with private or occupational pensions (particularly if these are tax deferred plans), rules have to be established regarding the disbursement of the pension funds. We summarize some of the important concepts involved.

(a) Because of the tax deferral benefit, a pensioner who reaches retirement age may not postpone indefinitely the disbursement of the pension. The pensioner is usually required to buy (with his pension funds) a life annuity or other type of annuity (life and survivor, life with a guaranteed payment period, etc.) not later than some age (e.g., 72 or 75);



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(b) In years before the purchase of the annuity, a pensioner who has reached retirement age may be obliged to make an annual "minimum withdrawal" from the pension fund (these withdrawals are subject to income tax);

(c) A pensioner who reaches retirement age may have the right to withdraw some portion of the pension fund as a lump sum. This lump sum is often tax free and is also a limited fraction of total funds, both for tax reasons and because withdrawing the entire pension fund at once defeats the purpose of the fund (which is old age security).

Once the occupational schemes market gets going, the Russian Federation will have to address these questions and others and come up with appropriate rules. Such rules, however, will have to await revamping of the current tax arrangements regarding private and occupational pensions.

Q. Sex discrimination in insurance and in pensions

The European Commission has recently proposed the adoption of a directive that would prohibit the gender-specific calculation of life insurance premiums. The Commission considers that taking into account the gender of the insured in calculating premiums constitutes unequal treatment of men and women. However, the Comité Européen des Assurances considers this interpretation faulty for the following reasons:

(a) When interpreting the principle of equal treatment between men and women, the European Court of Justice finds that discrimination exists if different provisions are applied to the same states of affairs or if the same provision is applied to different states of affairs. The equality principle is therefore violated only if unequal treatment cannot be justified through different underlying states of affairs.

Life expectancy differences are objective criteria observed for a long period and statistically proven and therefore constitute different states of affairs.

(b) Women live considerably longer than men. If insurers were to use unisex rates, there would in fact be unjust (unfair) treatment of both men and women, because women would be obliged to pay for term life products a premium higher than actuarially justified by their life expectancy and men would be obliged to pay for annuities and pensions a premium higher than actuarially justified by their life expectancy. Furthermore, since it is inconceivable that this subsidy of women's pensions by men and of men's insurance by women could ever exactly balance out, it can be argued that one or the other side is discriminated against.



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(c) The prohibition of a premium calculation based on risk characteristics abrogates the fundamental right of private autonomy, interferes in the freedom of contract and represents a serious intervention in the free price mechanism and a distortion of free competition.

We feel that the Russian Supervisory Authority should at present permit insurance companies to calculate life insurance premiums and pension premiums by sex. However, we cannot guarantee that unisex rates will not be imposed in the future, as the European Commission is not alone in pushing for unisex rates. There are several non-EU jurisdictions where, to the consternation of actuaries, there is mounting political pressure for unisex rates, technical issues notwithstanding! Furthermore, there is considerable feeling that defending gender-specific rates will, in the long run, be a losing battle.



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Conclusions and recommendations

Life insurance plays a significant role in the effective protection of an insured's dependents in case of death and in providing retirement income to the elderly. To protect life insurance policyholders, the European Union and its Member States have adopted laws and directives strengthening the prudential supervision of life undertakings. To bring the Russian system of life insurance and of pensions in line with EU practice, the Russian Supervisory Authority would be advised to adopt the following measures:

1. The Insurance Supervisory Department should adopt rules regulating the formation of reserves by insurance companies that underwrite life assurance contracts.

2. The policyholder should be given the opportunity to cancel the contract not later than 30 days from the day of receipt of the contractual documents (policy).

3. New insurance undertakings should not be licensed to conduct both life and non-life business. Existing "mixed" undertakings could be permitted to continue as before provided that they adopt separate administration / accounting for life and for non-life.

4. Within life insurance companies (or the life insurance division of a mixed insurance company), the assets backing long-term insurance liabilities should be accounted for separately from assets for short-term business.

5. Under certain exceptional circumstances, the Russian Supervisory Authority should have the right to demand a guarantee fund higher than that provided in law and/or a higher solvency margin than technically required. This right should be invoked if, e.g., there is evidence that policyholders' rights are seriously threatened or if there are serious infractions of the provisions governing reserves and investments. A somewhat higher guarantee fund might also be required of new companies.

6. Tariffs must be deregulated and insurance products priced freely by each insurer. Supervision should be limited to (a) monitoring company financial health (solvency, adequacy of reserves, suitability and adequacy of assets) and (b) ensuring consumer and policyholder protection and fair competitive practices.

7. Mathematical reserves must be calculated by a sufficiently prudent prospective actuarial valuation taking into account all future liabilities and all future premiums as determined by the policy conditions of each existing contract. Rules must also be promulgated regarding the calculation of short-term technical



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reserves such as unearned premium reserve, unexpired risks reserve and outstanding claims reserve (including IBNR). In the case of with-profits policies that provide guaranteed bonuses (a practice we advise against), appropriate additional reserves must be held. If bonuses are not guaranteed, such reserves are not necessary.

8. Investment rules for life insurance funds must be enacted specifying the classes of admissible assets and the administration of the investments.

9. Non-compliance with provisions referring to mathematical reserves and investment rules must lead to the imposition of a fine and, in the case of particularly serious infractions, to revocation of the insurer's license.

10. The list of assets constituting the company's "insurance deposit" (i.e., assets backing the mathematical and the technical reserves) must be submitted to the Supervisory Authority not later than three months after the approval of the company's balance sheet by the general meeting of the shareholders.

11. In the case of unit-linked policies, the insurer must disclose to the policyholder the fund to whose units the benefits are linked. If the fund is an "internal variable fund", the insurer must communicate the statutes (regulations) governing the fund. Asset-liability matching is particularly important in the case of a unit linked product, and the insurer must cover the relevant liabilities with units of the fund to which the product is linked. The bank where the covering assets are kept must notify the ISD at least once a month about the assets allocated by the insurance undertaking to the variable fund.

12. Taking into account the sex of the insured in calculating premiums does not constitute unequal treatment of men and women. Using "unisex rates" obliges women to pay a death insurance premium higher than the "actuarially correct" premium resulting from women's mortality and obliges men to pay survival insurance premiums and pension premiums higher than the "actuarially correct" premium resulting from men's mortality. We recommend that life insurers be permitted to price their products by sex.

13. The law must delineate the company actuary's statutory responsibilities and even provide penalties in case of dereliction of duty or malfeasance. In the context of a life company's balance sheet (annual statement), the actuary should sign a certificate affirming the adequacy of the company's insurance provisions. (Some jurisdictions even require the actuary to co-sign the entire annual statement.)



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14. The person auditing the company's accounts should attach to the company's annual statement an auditor's certificate listing any observations which may include key findings on issues relating to compliance with the relevant regulatory and accounting provisions. This certificate should be published together with the company's annual statement, thereby informing the shareholders, the general public and ISD of any violations. In the case of very serious violations, the auditor must have a duty, quite apart from the annual certificate, to report his findings to the supervisory authority directly and promptly.

15. The law must specify the moral and professional qualifications of a company's top management and of any shareholder in possession of a "qualifying holding" (shareholder owning, e.g., 10% or more of the company's shares). If the qualifying holding belongs to a legal person, the inquiry should extend to the natural persons controlling that legal person. Any legal or natural person who proposes to acquire a qualifying holding in an insurance undertaking must first inform the supervisory authority indicating the size of such intended holding. The ISD should have a reasonable length of time, say 3 months, to oppose the proposal.

16. In contrast to pay-as-you-go social security pensions, the amount of a private pension and/or occupational scheme pension is based on capitalization methods. This means that the amount of pension a given person will get is the exact actuarial equivalent of the contributions made by that person and/or on behalf of that person. The age at which the pension begins is contractually determined by the parties involved. Since a private pension is predicated on the actuarial equivalence between contributions and pension payments, it must be paid independently of the size of any state pension. On the other hand, it is quite acceptable to have a so-called "integrated pension plan", which is intended to supplement the state pension (such a plan involves actuarially determined contributions which are of course lower than they would be if the private pension were paid disregarding the state pension).

17. While many occupational pensions may be offered by organizations founded for that express purpose, existing financial institutions (such as life insurers) will very likely wish to offer occupational pension services. To avoid competition distortions, the Russian prudential requirements regarding occupational retirement schemes should apply equally to all types of institutions administering occupational pension plans. In deciding whether participation in an occupational pension scheme should be made mandatory, one has to weigh social policy objectives vs. the risk of collective agreements with anticompetitive aspects.



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Finally, excessive control on the investments of occupational schemes (placement of reserves only in state securities) must be abolished (though prudent general investment rules must obviously apply).

18. To give the Russian state pension system some relief, one should promote private and occupational retirement schemes. This will require generous tax incentives. Compared to other European countries, contributions are heavily taxed in Russia and these tax obstacles must be removed. Early surrender of tax-benefited pension funds for purposes unrelated to retirement should be discouraged by taxing the funds withdrawn.

19. Russia might consider the setting up of a Benefit Guarantee Fund (or State Compensation Scheme) intended to indemnify life policyholders if their life insurer becomes insolvent.

20. Finally, a decision must be made as to whether there will be a single supervisory authority for insurance and for pension funds or two separate ones (this varies by country).



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Annex I. Annex IV, section B of the recast Life Directive (2002/83/EC)

Annex IV, section B of the recast Life Directive (2002/83/EC) sets out the minimum solvency margin for life insurance companies’ solvency margins:

The minimum solvency margin shall be determined as shown below according to the classes of assurance underwritten.

(a) For the kinds of assurance referred to in Article 2(1)(a) and (b) (Life and pension insurance, annuities) of this Directive other than assurance linked to investment funds and for the operations referred to in Article 2(3) of this Directive (social security insurance when managed by private companies), it must be equal to the sum of the following two results:

- first result:

a 4% fraction of the mathematical provisions relating to direct business gross of reinsurance cessions and to reinsurance acceptances shall be multiplied by the ratio, for the last financial year, of the total mathematical provisions net of reinsurance cessions to the gross total mathematical provisions as specified above; that ratio may in no case be less than 85%,

- second result:

for policies on which the capital at risk is not a negative figure, a 0,3% fraction of such capital underwritten by the assurance undertaking shall be multiplied by the ratio, for the last financial year, of the total capital at risk retained as the undertaking's liability after reinsurance cessions and retro cessions to the total capital at risk gross of reinsurance; that ratio may in no case be less than 50%.

For temporary assurance on death of a maximum term of three years the above fraction shall be 0,1%; for such assurance of a term of more than three years but not more than five years the above fraction shall be 0,15%.

b) For the supplementary insurance referred to in Article 2(1)(c) of this Directive [accident and sickness insurance], it shall be equal to the result of the following calculation:

- the premiums or contributions (inclusive of charges ancillary to premiums or contributions) due in respect of direct business in the last financial year in respect of all financial years shall be aggregated,



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- to this aggregate there shall be added the amount of premiums accepted for all reinsurance in the last financial year,

- from this sum shall then be deducted the total amount of premiums or contributions cancelled in the last financial year as well as the total amount of taxes and levies pertaining to the premiums or contributions entering into the aggregate.

The amount so obtained shall be divided into two portions, the first extending up to EUR 10 million and the second comprising the excess; 18% and 16% of these portions respectively shall be calculated and added together.

The result shall be obtained by multiplying the sum so calculated by the ratio existing in respect of the last financial year between the amount of claims remaining to be borne by the assurance undertaking after deduction of transfers for reinsurance and the gross amount of claims; this ratio may in no case be less than 50%.

c) For permanent health insurance not subject to cancellation referred to in Article 2(1)(d) of this Directive, and for capital redemption operations referred to in Article 2(2)(b) thereof, it shall be equal to a 4% fraction of the mathematical provisions calculated in compliance with the conditions set out in the first result in (a) of this section.

d) For assurance covered by Article 2(1)(a) and (b) [Life and pensions insurance] of this Directive linked to investment funds and for the operations referred to in Article 2(2)(c), (d) and (e) [pension insurance] of this Directive it shall be equal to:

- a 4% fraction of the mathematical provisions, calculated in compliance with the conditions set out in the first result in (a) of this section in so far as the assurance undertaking bears an investment risk, and a 1% fraction of the provisions calculated in the same way, in so far as the undertaking bears no investment risk provided that the term of the contract exceeds five years and the allocation to cover management expenses set out in the contract is fixed for a period exceeding five years, plus

- a 0,3% fraction of the capital at risk calculated in compliance with the conditions set out in the first subparagraph of the second result of (a) of this section in so far as the assurance undertaking covers a death risk.



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Annex II. Article 20 of the 2002 Life Directive

Article 20 of the 2002 Life Directive sets out the basic principles for the establishment of technical provisions:

1. The home Member State shall require every assurance undertaking to establish sufficient technical provisions, including mathematical provisions, in respect of its entire business.

The amount of such technical provisions shall be determined according to the following principles.

A. (i) the amount of the technical life-assurance provisions shall be calculated by a sufficiently prudent prospective actuarial valuation, taking account of all future liabilities as determined by the policy conditions for each existing contract, including:

- all guaranteed benefits, including guaranteed surrender values,

- bonuses to which policy holders are already either collectively or individually entitled, however those bonuses are described - vested, declared or allotted,

- all options available to the policy holder under the terms of the contract,

- expenses, including commissions, taking credit for future premiums due.

(ii) the use of a retrospective method is allowed, if it can be shown that the resulting technical provisions are not lower than would be required under a sufficiently prudent prospective calculation or if a prospective method cannot be used for the type of contract involved;

(iii) a prudent valuation is not a "best estimate" valuation, but shall include an appropriate margin for adverse deviation of the relevant factors;

(iv) the method of valuation for the technical provisions must not only be prudent in itself, but must also be so having regard to the method of valuation for the assets covering those provisions;

(v) technical provisions shall be calculated separately for each contract. The use of appropriate approximations or generalisations is allowed, however, where they are likely to give approximately the same result as individual calculations. The principle of separate calculation shall in no way prevent the establishment of additional provisions for general risks, which are not individualised;



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(vi) where the surrender value of a contract is guaranteed, the amount of the mathematical provisions for the contract at any time shall be at least as great as the value guaranteed at that time.



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Annex III. Article 23 of the 2002 Life Directive

In the EU, Article 23 of the 2002 Life Directive provides that assets that may be used as an "insurance deposit" (i.e., to cover reserves) are as follows:

A. Investments

(a) debt securities, bonds and other money- and capital-market instruments;

(b) loans;

(c) shares and other variable-yield participations;

(d) units in undertakings for collective investment in transferable securities (UCITS) and other investment funds;

(e) land, buildings and immovable-property rights;

B. Debts and Claims

(f) debts owed by reassurers, including reassurers' shares of technical provisions;

(g) deposits with and debts owed by ceding undertakings;

(h) debts owed by policy holders and intermediaries arising out of direct and reassurance operations;

(i) advances against policies;

(j) tax recoveries;

(k) claims against guarantee funds;

C. Others

(l) tangible fixed assets, other than land and buildings, valued on the basis of prudent amortisation;

(m)cash at bank and in hand, deposits with credit institutions and any other body authorised to receive deposits;

(n) deferred acquisition costs;

(o) accrued interest and rent, other accrued income and prepayments;

(p) reversionary interests.

3. The inclusion of any asset or category of assets listed in paragraph 1 shall not mean that all these assets should automatically be accepted as cover for technical provisions. The home Member State shall lay down more detailed rules



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fixing the conditions for the use of acceptable assets; in this connection, it may require valuable security or guarantees, particularly in the case of debts owed by reassurers.In determining and applying the rules which it lays down, the home Member State shall, in particular, ensure that the following principles are complied with:

(i) assets covering technical provisions shall be valued net of any debts arising out of their acquisition;

(ii) all assets must be valued on a prudent basis, allowing for the risk of any amounts not being realisable. In particular, tangible fixed assets other than land and buildings may be accepted as cover for technical provisions only if they are valued on the basis of prudent amortisation;

(iii) loans, whether to undertakings, to a State or international organisation, to local or regional authorities or to natural persons, may be accepted as cover for technical provisions only if there are sufficient guarantees as to their security, whether these are based on the status of the borrower, mortgages, bank guarantees or guarantees granted by assurance undertakings or other forms of security;

(iv) derivative instruments such as options, futures and swaps in connection with assets covering technical provisions may be used in so far as they contribute to a reduction of investment risks or facilitate efficient portfolio management. They must be valued on a prudent basis and may be taken into account in the valuation of the underlying assets;

(v) transferable securities which are not dealt in on a regulated market may be accepted as cover for technical provisions only if they can be realised in the short term or if they are holdings in credit institutions, in assurance undertakings, within the limits permitted by Article 6, or in investment undertakings established in a Member State;

(vi) debts owed by and claims against a third party may be accepted as cover for the technical provisions only after deduction of all amounts owed to the same third party;



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(vii) the value of any debts and claims accepted as cover for technical provisions must be calculated on a prudent basis, with due allowance for the risk of any amounts not being realisable. In particular, debts owed by policy holders and intermediaries arising out of assurance and reassurance operations may be accepted only in so far as they have been outstanding for not more than three months;

(viii) where the assets held include an investment in a subsidiary undertaking which manages all or part of the assurance undertaking's investments on its behalf, the home Member State must, when applying the rules and principles laid down in this Article, take into account the underlying assets held by the subsidiary undertaking; the home Member State may treat the assets of other subsidiaries in the same way;

(ix) deferred acquisition costs may be accepted as cover for technical provisions only to the extent that this is consistent with the calculation of the mathematical provisions.



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Annex IV. Article 24(1) of the EU Directive (2002/83)

The EU Directive (2002/83) at Article 24(1) makes clear provision for the diversification of assets, to prevent assets being over-concentrated:

1. As regards the assets covering technical provisions, the home Member State shall require every assurance undertaking to invest no more than:

(a) 10 % of its total gross technical provisions in any one piece of land or building, or a number of pieces of land or buildings close enough to each other to be considered effectively as one investment;

(b) 5 % of its total gross technical provisions in shares and other negotiable securities treated as shares, bonds, debt securities and other money- and capital-market instruments from the same undertaking, or in loans granted to the same borrower, taken together, the loans being loans other than those granted to a State, regional or local authority or to an international organisation of which one or more Member States are members. This limit may be raised to 10 % if an undertaking invests not more than 40 % of its gross technical provisions in the loans or securities of issuing bodies and borrowers in each of which it invests more than 5 % of its assets;

(c) 5 % of its total gross technical provisions in unsecured loans, including 1 % for any single unsecured loan, other than loans granted to credit institutions, assurance undertakings - in so far as Article 6 allows it - and investment undertakings established in a Member State. The limits may be raised to 8 % and 2 % respectively by a decision taken on a case-by-case basis by the competent authority of the home Member State; (d) 3 % of its total gross technical provisions in the form of cash in hand;

(e) 10 % of its total gross technical provisions in shares, other securities treated as shares and debt securities, which are not dealt in on a regulated market.2. The absence of a limit in paragraph 1 on investment in any particular category does not imply that assets in that category should be accepted as cover for technical provisions without limit. The home Member State shall lay down more detailed rules fixing the conditions for the use of acceptable assets. In particular it shall ensure, in the determination and the application of those rules that the following principles are complied with:

(i) assets covering technical provisions must be diversified and spread in such a way as to ensure that there is no excessive reliance on any particular category of asset, investment market or investment;



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(ii) investment in particular types of asset which show high levels of risk, whether because of the nature of the asset or the quality of the issuer, must be restricted to prudent levels;

(iii) limitations on particular categories of asset must take account of the treatment of reassurance in the calculation of technical provisions;

(iv) where the assets held include an investment in a subsidiary undertaking which manages all or part of the assurance undertaking's investments on its behalf, the home Member State must, when applying the rules and principles laid down in this Article, take into account the underlying assets held by the subsidiary undertaking; the home Member State may treat the assets of other subsidiaries in the same way;

(v) the percentage of assets covering technical provisions which are the subject of non-liquid investments must be kept to a prudent level;

(vi) where the assets held include loans to or debt securities issued by certain credit institutions, the home Member State may, when applying the rules and principles contained in this Article, take into account the underlying assets held by such credit institutions. This treatment may be applied only where the credit institution has its head office in a Member State, is entirely owned by that Member State and/or that State's local authorities and its business, according to its memorandum and articles of association, consists of extending, through its intermediaries, loans to, or guaranteed by, States or local authorities or of loans to bodies closely linked to the State or to local authorities.



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DISCLAIMER:

The following document reflects only the opinion of the consortium comprised of: PricewaterhouseCoopers Risk Management (Belgium), ZAO PricewaterhouseCoopers Audit, (Moscow)IKRP Rokas & Partners Law Firm, McGraw-Hill International (UK) Limited (Standard and Poor’s). It does not in any way reflect the opinion of or prejudice the position of the European Union, the European Commission or the TACIS programme.

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